ERTC And PPP Loan: What's The Difference?

ERTC and PPP loans are available to businesses during the coronavirus pandemic. The Employee Retention Tax incentive (ERTC) is a federal tax incentive that helps companies to retain employees during the COVID-19 pandemic. It was created as part of the CARES Act and is overseen by the Internal Revenue Service (IRS) to incentivize businesses to keep their employees during the pandemic.

In contrast, a Paycheck Protection Program (PPP) loan is designed to help small businesses keep their employees on the payroll while assisting them to remain financially stable during the coronavirus pandemic. PPP funds are made available through the SBA's 7(a) loan program and provide forgivable loans designed to cover payroll costs, employee benefits, and other expenses.

What is the difference Between ERTC And PPP Loan?

Eligibility

Employee Retention Tax Credit is available to any business with 500 or fewer employees that have been affected by the economic losses caused by the COVID-19 pandemic. Meanwhile, PPP funds require small businesses to be SBA-approved lenders and demonstrate a 25% decrease in gross receipts year-over-year.

Loan Amount

Employee Retention Credit may provide up to $2 million in assistance, whereas PPP loans may provide up to ten times the average monthly payroll expenditures (up to a maximum of $10 million). Additionally, ERTC loans have a 3.75% interest rate, whereas PPP funds have an interest rate of 1%.

Repayment

The considerable difference between these two programs is how they are funded. The PPP loans should be repaid with the loan amount plus the interest, even though the borrower eventually qualifies for loan forgiveness. On the contrary, the ERC doesn't have to be repaid.

Usage

Employee Retention Credit can be used for working capital expenses, such as payroll and inventory costs. At the same time, a PPP loan is specifically designed to cover payroll costs, employee benefits, and other expenses.

Can You Apply For Both Employee Retention Tax Credit and PPP Loan?

Businesses can apply for both Employee Retention Credit and PPP funds, although the two are distinct in purpose and use. A PPP loan gives up to 10 times the average monthly payroll expenditures (up to a maximum of $10 million). In contrast, an Employee Retention Tax Credit loan is designed to cover working capital expenses and provide up to $2 million in assistance. It is intended to cover payroll costs, employee benefits, and other fees.

That said, businesses must be mindful that they cannot use an Employee Retention Credit loan for payroll costs or other expenses covered by a PPP loan. Additionally, funds received through both programs may be used for different purposes. For instance, if a business received an Employee Retention Tax Credit and PPP loan, the funds from both loans cannot be used to cover payroll costs.

Eligibility Requirements For Employee Retention Tax Credit and PPP Loan

ERTC Eligibility

To be eligible for an ERTC loan, businesses must have experienced an economic injury due to the COVID-19 pandemic and have 500 or fewer employees. Businesses must also be located in the United States, a U.S. territory, or a tribal reservation and must not have caused economic injury. Furthermore, the company must demonstrate a need for the loan and show that other sources of financing are not available.

The SBA requires businesses to submit specific documentation before receiving an ERTC loan, including proof of identity, records of financial statements or tax returns, proof of ownership and affiliation, copies of contracts, leases, etc. Additionally, the SBA requires businesses to have an acceptable credit history.

Finally, the SBA will look at a company's credit score to determine how much money it can borrow and how quickly it must be repaid. The maximum loan amount for an ERTC loan is $2 million, with a 3.75% interest rate.

PPP Loan Eligibility

To qualify for a PPP loan, businesses must be SBA-approved lenders and demonstrate a 25% decrease in gross receipts year-over-year. Additionally, businesses must have 500 or fewer employees and have experienced an economic impact due to the COVID-19 pandemic.

The loan amount will be determined by the average monthly payroll expense of the company, up to a maximum of $10 million. The SBA will also review a business's credit history and score to determine the amount of loan they can receive and the rate at which it must be repaid. PPP loans have an interest rate of 1%.

ERTC and Payroll Protection Program Loan Application

ERTC Application Process

Applying for the Employee Retention Credit entails several processes that must be completed to verify your company's eligibility and the amount to which the COVID-19 epidemic has impacted it.

1. Determine Eligibility: The first step revolves around understanding the eligibility criteria outlined by the IRS, which were detailed previously in this article. Remember that the primary conditions include a major stoppage of activities owing to government directives or a significant decrease in gross receipts when compared to the same calendar quarter in 2019.
2. Calculate Potential Credit: Once you've determined your business is eligible, you must calculate the potential credit. This calculation depends on your number of employees, the amount of qualified wages, and whether you're calculating for 2020 or 2021, as the credit rates differ for each year.
3. Gather Required Documentation: You must collect and maintain documents verifying your ERTC eligibility. These documents may include records showing how you determined the amount of qualified wages paid to employees, copies of any relevant government orders related to COVID-19, and financial records indicating a decline in gross receipts.
4. Claim the Credit: You can claim the ERTC by reporting your total qualified wages and the related health insurance costs on your quarterly employment tax return (Form 941). If your business is eligible for advance credit payment, you can submit Form 7200 to the IRS.
5. Wait for Approval: After submitting your forms, the final step is to wait for the IRS to review your application and approve your credit. Keeping all your relevant documentation and records on hand is essential in case any queries or audits arise.

The ERTC application process requires careful planning and accurate record-keeping to ensure you receive the maximum credit your business is entitled to. Always consult with a tax professional when in doubt.

PPP Loans Application

With the Paycheck Protection Program (PPP) loan forgiveness application, businesses must fill out an application form from the Small Business Administration. They must provide proof of their identity and other documents. The SBA will look at the business's credit score and history to decide how much money they can borrow and what interest rate they must repay it with. The most a company can borrow is $10 million, and the interest rate is 1%.

After receiving the application, the SBA will analyze it and decide whether to approve or deny the loan. If agreed, businesses must sign a promissory note that states how long they have to pay back the loan (up to 10 years) as well as any other terms that might be applicable. Additionally, businesses must provide proof of their expenses and use of funds to the SBA.

ERTC and PPP Requirements

ERTC Requirements:

• Businesses must have experienced an economic injury due to the COVID-19 pandemic and must have 500 or fewer employees.

• They must be located in the United States, a U.S. territory, or a tribal reservation and not have caused the economic injury themselves.

• They must demonstrate a need for the loan and show that other sources of financing are not available.

• Businesses must submit documents such as proof of identity, records of financial statements or tax returns, wages paid, proof of ownership and affiliation, copies of contracts, leases, etc.

• The SBA will review a business's credit history and score to determine the amount of loan they can receive and the rate at which it must be repaid.

• The maximum loan amount for refundable tax credit is $2 million, with an interest rate of 3.75%.

PPP Requirements:

• Businesses must employ 500 or fewer people and have incurred economic losses due to the COVID-19 outbreak.

• Business must be located in the United States, a U.S. territory, or a tribal reservation and must not have caused the economic injury themselves.

• Businesses must provide proof of identity and other documentation.

• The SBA will examine the business's credit score to determine the loan amount available and the interest rate at which it must be repaid.

• Maximum loan amount for PPP loan forgiveness is $10 million, with an interest rate of 1%.

• Businesses must provide proof of their expenses and use of funds to the SBA.

• Businesses must submit documentation such as proof of identity, records of financial statements or tax returns, proof of ownership and affiliation, copies of contracts, leases, etc.

• Loan repayment term is up to 10 years.

The Economic Injury Disaster Loan (ERTC) and Payroll Protection Program PPP loan forgiveness are offered by the Small Business Administration and the Internal Revenue Service to provide financial assistance for businesses affected by COVID-19. These loans require specific documentation and have a maximum loan amount and an interest rate determined based on the business's credit score.

If ever you could claim Payroll Protection Program (PPP) loans before, you can still apply for retention tax credit ERTC. Additionally, as of the moment of writing, the PPP loan is no longer available, and the Employee Retention Credit (ERC) deadline is getting near. Ask for help from the ERTC Express to improve your ERC processes!